Even more on nominal wages: A few more notes on the did-FDR-prolong-the-Depression front:
Gauti Eggertsson has an interesting paper arguing that NIRA policies, by reducing the expected rate of deflation, were actually expansionary.
There have been a lot of responses to my demonstration that the usual argument about the contractionary effects of wage increases doesn’t apply in a liquidity trap. I think it’s important to remember where we started — with the flat claim that FDR made things worse because he kept nominal wages too high. That’s a pretty simple argument, which happens to be wrong.
Might there have been some more subtle, complex mechanism at work? Maybe, but this is starting to feel like a conclusion in search of an argument to support it.
That said, Greg Mankiw makes an interesting point: he argues that the NIRA, by increasing workers’ bargaining power in the long run, might have discouraged business investment. In principle, this could be right. But my question is, do we need this to explain weak investment in the 1930s? Look at industrial production:
It stayed far below its 1929 peak for almost the whole decade, so that there must have been huge excess capacity almost everywhere. Why would businesses have wanted to invest, even if the labor movement had stayed down and out?
Add: Gauti Eggertsson sends me this figure on investment, from his recent AER paper:
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